The “Sweet Spot” for Liability-Driven Investing (LDI)
The recent combination of rising yields on long corporate bonds and improvements in defined benefit (DB) pension plan funding has created a “sweet spot” for plan sponsors looking to lock in funded status gains.
Now May Be a Good Time for DB Plans to Lock in Funded Status Gains
Data as of 10/31/22. Source: Bloomberg.
- In 2009, the last time yields on long corporate bonds were in the 6% range, the average funded status (assets to liabilities) in DB pension plans was around 80%.
- Pension plan funded statuses improved over the past decade. Unfortunately, available yields on long bonds kept dropping, making it less enticing to commit more plan assets to long corporate bonds.
- Today, yields on long corporate bonds are back to around 6%, and many DB pension plan sponsors are enjoying funded statuses of over 100%, making this a potential opportune time to lock in funded status gains.
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